TRIS Rating affirms the rating of “A+” for the company rating and the ratings of the outstanding senior unsecured debentures of Mitr Phol Sugar Corporation Ltd. (MPSC). At the same time, TRIS Rating assigns the rating of “A+” to MPSC’s proposed issue of up to Bt10,100 million in senior unsecured debentures. The proceeds from the new debentures will be used for repay its existing debt and planned capital expenditures.
The ratings reflect MPSC’s market position as one of the world’s leading sugar producers, well-accepted brand name, efficient sugar mill operations, geographic diversification, and diversified sources of income. The ratings are partially offset by the cyclical and the volatile nature of the prices of sugar and sugarcane, as well as the ongoing sugar industry restructuring in Thailand.
MPSC posted weaker operating results. Revenue grew by 2.6% year-on-year (y-o-y) to Bt23,922 million in the first three months of 2018. Despite the increase in revenue, the operating profit margin fell. The ratio of operating income before depreciation and amortization to sales, including gains from future contracts deteriorated to 23.9% in the first quarter of 2018, compared with 31.5% over the same period in 2017. The drop was due to poor results in the sugar segment following the sluggish sugar price, while ethanol and power segments were benefited from lower fuel cost on the back of rising fuel supply from higher cane volume in the 2017/2018 crop year. Earnings before interest, tax, depreciation, and amortization (EBITDA) slipped by 19.7% y-o-y to Bt6,186 million in the first quarter of 2018. Funds from operations (FFO) also shrank, sinking by 21.6% y-o-y to Bt4,604 million.
Due to weaker operating performance, and a jump in working capital needs during the sugarcane harvest period, the ratio of total debt to capitalization jumped to 59.2% as of March 2018, compared with 50%-52% in 2014-2017. The FFO to total debt ratio was 13.9% (annualized, from the trailing 12 months) in the first quarter of 2018, compared with 18%-22% in 2014-2017. Despite the drop, liquidity remained acceptable.
Looking forward, the competition among sugar producers in the domestic market is expected to intensify. Every producer would like to gain more shares in domestic market. Nevertheless, TRIS Rating holds the view that MPSC would stay competitive amidst the rising competition, given its scale, the efficiency of its mills, wide market coverage, nationwide distribution channels, and strong brand name.
RATING OUTLOOK
The “stable” outlook reflects the expectation that MPSC will maintain its leading position in both the Thai and Chinese sugar industries. MPSC is expected to retain its competitiveness even after the sugar industry in Thailand is liberalized.
Under TRIS Rating’s base case scenario, MPSC’s EBITDA is forecast to drop to around Bt17,000 million in 2018 under the low sugar prices worldwide and would gradually improve to approximately Bt21,000 million per year along the cycle of sugar prices. FFO is projected to hold at Bt13,000 million in 2018 and climb to Bt16,000 million in 2020. MPSC plans to issue new debentures worth up to Bt10,100 million. About half of the proceeds will be used for repay existing debt while the remainder will be used for planned capital expenditures. The capital expenditures and the degree of leverage after the debenture issuance are both in line with TRIS Rating’s projection. Leverage will peak in the first half of 2018, then decline in the second half. The rise in leverage is due to a huge increase in inventory and the resultant increase in working capital. According to TRIS Rating’s estimation, the total debt to capitalization ratio will hover around 60% in the first half of 2018, and then decline gradually to around 52% at the end of 2018. Given the projected levels of cash flow and capital expenditures, leverage should hold at a moderate level. Over the next three years, the FFO to total debt ratio is projected to stay in the range of 18%-24% and the EBITDA interest coverage ratio is expected to hold at 5-6 times.
RATING SENSITIVITIES
MPSC’s ratings or outlook would be downgraded if MPSC’s operating performance or market position is significantly weaker than expected, causing cash flow protection to deteriorate for a sustained period of time. Any large, debt-funded investment that would weaken the debt to capitalization ratio would also be a negative factor for MPSC’s credit ratings. On the contrary, the rating upside case could emerge if MPSC’s financial profile is significantly strengthened on a sustainable basis.
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